Here’s an example situation – one which I know has been happening around and about of late:

A carpentry business employs tradesmen carpenters. The boss tells his tradesmen that they would be better off as contractors to the business because they can charge a higher hourly rate than he currently pays them, and they can claim their tools and other things as business expenses. He lays them all off, gets them to go off and get an Australian Business Number (ABN) and then RE-contracts them as ‘independent contractors’.

(Note: Having an ABN doesn’t make you a ‘contractor ‘ – it’s just a tax administration number. But it is required for anyone starting a business.)

What’s happening in the above example is the boss is actually selling you a business idea – like the used car salesman trying to sell you a car. You’d check it all out, right and make sure that everything he said was true? Well the same applies in this situation: If someone tells you you should become a business because you’ll be better off than as an employee, lift the bonnet! Check it out.

First up ask yourself: Do I want to be a business owner – and all that entails? Or do I want to be an employee? If you want to remain an employee then you can say no to the proposal. If in the above example the tradesmen are told “Well if you don’t do it we’ll just lay you off. We’re changing the model of our business and will only use contractors”, then you can go to the Fair Work Ombudsman because the boss is acting unlawfully.

If you decide his proposal sounds pretty good and you might give being a business owner a go, you need to act like one! This means telling the boss that you’re interested in his proposal but you need time to work out the figures. If the boss has indicated the hourly rate he intends to pay you as a contractor, you need to work out if it will cover all your expenses and that it’ll be enough to be profitable for you – otherwise why would you do it?

You’ll need to get some advice about the best way to set up: a company, a sole operator, or some other structure. This will be different for everyone depending upon your circumstances. After you’ve decided on a business structure, as a contractor you’d expect to be getting at least 25% over your base rate of pay – at least – because now you will be responsible for your leave (ie you won’t be receiving loading from your boss anymore) and superannuation payments. You will have to register for the PAYG system and lodge quarterly – or yearly – PAYG tax payments. If you anticipate earning over $75,000/year (as at 2010) you’ll need to register for GST and prepare BAS statements – and add the GST to your invoices to your old boss. If you set up as a company you’ll be responsible for your own worker’s compensation requiring registration and payment of the premiums.

You’ll also be able to claim business expenses – and you should speak to your accountant about what might be covered.

If after doing all these things you decide that becoming a contractor will work in your favour then go ahead. But if you decide that it’s all too much and you’d prefer to remain an employee then tell your boss no. If he lays you off permanently you may have a case for unfair dismissal.